The importance of carbon pricing for small business owners
Posted in GreenBiz
March 15, 2022

The importance of carbon pricing for small business owners

As of June, 59 countries — responsible for about 55 percent of global greenhouse gas emissions — had outlined their net-zero commitments and promised to meet them by 2050. Achieving these goals requires pricing for carbon to be very high, according to the International Energy Agency’s World Energy Outlook 2021. For small and mid-sized business owners, carbon pricing matters — and will matter even more in the coming months.

While carbon pricing may have the biggest near-term effect on larger companies, the direction of travel suggests all business owners will increasingly need to understand carbon pricing, the costs associated with it and the consequences upon their profits.

There are several key items that business owners, of any sized company, need to know now as carbon markets evolve and their business adapts:

The regulated carbon market is fragmented and complex

You will need to educate yourself.

Business owners will increasingly benefit from knowing about the developing carbon pricing systems, regulations and market conditions in the jurisdictions where they operate.

The first big difference lies in mechanisms to price carbon. Tax systems assign a flat price for every ton of carbon dioxide emitted. One ton of emissions in Sweden costs $137. The same emission in Poland would cost less than a dollar. With no legally binding limit on emissions, carbon taxes may not reduce emissions if companies have sufficiently deep pockets and price-insensitive customers.

Emissions trading systems allow firms to emit a set amount of carbon dioxide per year, with the cap falling each year to encourage reductions. This system provides certainty on the amount of permissible emissions, but leads to uncertainty and volatility of carbon costs. Government carbon allocations vary. So too do prices. While the price of allowances under the European Union Emissions Trading Scheme reached a peak of $110 per ton, jumping fourfold year over year, prices in China — the largest emissions scheme globally by coverage — stood at $9/tCO2.

The voluntary carbon market won’t sustainably offset small business emissions

Since the late 1980s, voluntary carbon markets have used private pricing mechanisms and a variety of “offsetting” activities to help firms compensate for greenhouse gas emissions. But their efficacy is increasingly being questioned.

Business owners may best see voluntary carbon credits as a temporary solution to abatement or as a way to address areas where carbon reduction is presently difficult.

First, there is growing debate on whether voluntary schemes support or distract from a global ambition to reduce greenhouse gas emissions. If companies (and individuals) prefer to carry on as normal but increasingly use voluntary carbon markets, there is a risk that polluting activities — whose costs often fall on others — will continue unabated.

The second objection concerns transparency. In particular voluntary schemes rely on private supply and demand dynamics whose cost of carbon may not reflect the true “social” cost of emissions.

In short, business owners may best see voluntary carbon credits as a temporary solution to abatement or as a way to address areas where carbon reduction is presently difficult.

Consider accelerating transition strategies to combat rising carbon prices

While there is little dispute that carbon prices will rise, there is considerable uncertainty over the speed of price rises. The International Energy Agency (IEA) expects carbon prices to climb to $130/ton and $90/ton in advanced and major emerging economies respectively by 2050 in order to meet net-zero ambitions. Business owners should also bear in mind that a potential price “floor” could be the estimated social cost of carbon — the present value of all the damage caused by an extra ton of carbon dioxide emissions. The current U.S. administration concluded this social cost is $51/tCO2, standing below half of the level suggested by IEA.

Faced with higher prices and looming uncertainty over when rises will occur, it is believed that business owners would do well to reconsider their carbon profile and consider redeploying capital into more sustainable solutions. Examples might include increased investment into fossil fuel alternatives; energy storage (including green hydrogen); energy efficiency; and carbon capture and storage.

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March 15, 2022 at 01:21PM

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